60 years ago peripherals wrote off half Germany’s debt

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assets, Athens, austerity, Austria, bailout, bonds, Bunds, crisis, debt, debt crisis, debt forgiveness, default, EU, euro, euro currency, Europe, eurozone, greece, International Monetary Fund, investors, Ireland, Italy, Merkel, monti, Portugal, recession, restructuring, Spain, UK, wealth

Today isn’t just Wednesday. It is 60 years since Greece, Spain and Italy forgave half of Germany’s debts. Since then Europe has had peace and Germany has prospered to become an economic titan in Europe and the world.

Sixty years ago it was Germany begging for forgiveness. And those countries who today are called the debt-ridden “periphery” were the judges in court. Germany, fresh from military defeat, was not in a strong position to bargain yet those countries gave it another chance.

That dramatic revelation can be read here on German online website Deutsche Welle: http://www.dw.de/german-economic-miracle-thanks-to-debt-relief/a-16630511

Today, the tables are turned but the sentiment is not there. Germany’s dogmatic Chancellor Angela Merkel, preoccupied with elections at home in September, is insisting that Greece, Spain, Italy, Ireland and Portugal adhere to unpopular austerity measures rather than write off half their debts the way they were in 1953.

That unpopularity has already come at a price. This week’s inconclusive Italian national elections have surprised even Italy at how no one has overall power and by how the President of Italy is not able by constitution to call fresh elections 6 months before he retires. And Europe is in despair at what this could mean for the austerity plans and war on debt.

Elsewhere there have been national strikes and rioting in countries like Greece. It’s working? Not yet. But the price of the dogma is already huge.

I have written extensively on this and why I believe that debt forgiveness is important and the only lasting solution to the debt crisis.

Indeed I hinted on how we should consider writing off debts and a similar amount of inflated assets in order to wipe the debt slate clean. This I applied to the case of the UK property price crisis in an article entitled UK readies for new “first timers” property crash on 13 March 2012.

And on 23 October 2012, I returned to the issue and cited Jörg Krämer, chief economist at Commerzbank in Frankfurt, on why some form of debt forgiveness is inevitable for countries like Greece: Austerity makes debt bloat, but there is a better way.

Today, the 60th anniversary of such a meaningful and publicly-spirited action by Mediterranean countries towards Germany ought to be reciprocated.

Indeed, it is perhaps notable that since 1860 when Germany and Italy changed their constitutions Germany has defaulted three times on its debt. Italy never has.

 

 

North Atlantic Rift: What US and Europe must do to combat the financial crisis, Mr President

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Barack Obama, CDO, debt crisis, election, Europe, Federal Reserve, greece, inflation, interest rates, Ireland, Mitt Romney, North Atlantic Rift, polls, Portugal, President, subprime, US, war

Today the United States of America goes to the polls. The booths have just opened but I am writing from the safety of Europe – not a phrase you hear said too often –  but still trying to ponder partisan-free what happens whoever wins the race to the White House.

This is not about party politics or favoured candidates. It is not about safe pair of hands or reasoning for change. It is not about an independent central bank or the possibility that one of the main candidates may want to bring the Federal Reserve under political control. There. How’s that for trying to stay non-political?

There have been commentators in the United States and elsewhere in the world who have been quick to blame Europe for everything that has been going wrong. They have been fast to suggest that even with faults included, the USA is more adept at handling the crisis than Europe. There have also been many anti-American commentators in Europe who have endlessly tried to point the finger at CDOs and subprime mortgages and blame the United States for starting it in 2007.

Neither of these positions is all that helpful. Frankly, it is just another partisan political slanging match on a larger scale than that fought this year between Barack Obama and Mitt Romney.

At the weekend, I met with a fund manager for a UK financial group famous for its tracker products aimed at segregated pension funds and pooled funds, aka unit trusts. This fund manager is, by definition, an enormous bond holder too.

I asked the fund manager how would he solve the credit crisis which feels like trench warfare and which some politicians have unhelpfully suggested could lead to military conflict, at least within Europe if not with the United States! A financial crisis which has gone on for a year longer than World War One and will beat World War Two’s record in nine months’ time.

He offered a very helpful explanation. He felt that the bond yield curve has a lot more steepening it needs to do. And while accepting debt forgiveness, something I have blogged previously in an asset meltdown scenario, he focused simply on two factors. Both have been tried, one in the US and the other in Europe. But neither has been tried in each other’s camps.

The collapse of Lehman Brothers in the US was a shock but with the benefit of hindsight it had a redeeming feature. Austerity measures in Europe are underway and already producing benefits. They are biting and beginning to turn some of the ships around. Bailout nations like Ireland are seeing growth and Portugal is also on course to improve.

“But the problem is, we need to cut off the banks’ life support in Europe and have a Lehmans here. Meanwhile, we need the US to accept austerity measures, something they seem totally resistant to,” the fund manager remarked.

And there is the stark reality of our self-imposed “North Atlantic Rift” if I may coin the phrase. European and UK banks which do not want to stop cheap funding coming their way because it feels good, masks a few problems and throws the can further down the road. And US citizens who think that one meltdown on Wall Street was good punishment and no need for the citizens to feel any pain alongside the bankers.

The common theme of this denial by European banks and US citizens, is that both groups need cheap credit to keep this going. As the world’s debt pile swells and gradually widens its territorial base as well as elevates its peak, we are doing it because “we can”, to use a slogan from the last US Presidential election. Not because we should.

Those investors worried by inflation are not a minority anymore. Inflation-linked products are being lapped up as a recent few sales by European governments showed. And when the biggest liquidity funnel in peacetime is stemmed one day in the not infinite future, interest rates will shoot up. Without economic growth to absorb the shock, we will also just rather noisily go bankrupt.

So my message to the next President of the United States is: work with Europe and take on some austerity at home while you are young into your four-year term. Get it over and done with to secure the prosperity of future generations.